A natural monopoly under rate of return regulation has an incentive to
A) inflate its costs.
B) produce more than the efficient quantity of output.
C) charge a price equal to marginal cost.
D) maximize consumer surplus.

Question

Quizplus · Accepted Answer

Under rate of return regulation, a natural monopoly is allowed to earn a specified rate of return on its investments. This creates an incentive to inflate costs because higher costs can justify higher prices, leading to increased revenue and profits within the allowed rate of return.

A Natural Monopoly Under Rate of Return Regulation Has an Incentive